The People’s Bank of China (PBOC) is anticipated to set the USD/CNY reference rate at 7.2518 according to Reuters. The central bank’s reference rate is expected to be announced around 0115 GMT.

The PBOC employs a managed floating exchange rate system with the yuan, allowing its value to move within a predefined band. This band is currently set at +/- 2% around a central reference rate, also known as the midpoint.

The Role Of The Midpoint

Each morning, the PBOC establishes a midpoint against a currency basket, mainly the US dollar. The midpoint factors in market supply and demand, economic indicators, and international currency fluctuations. This midpoint guides that day’s trading activities for the yuan.

The trading band allows the yuan to move within a designated range around the midpoint. This allows for a potential appreciation or depreciation of up to 2% during a single trading day. The PBOC can amend this range depending on economic conditions and aims.

Should the yuan approach the band’s limit or show excessive volatility, the PBOC may intervene. This involves buying or selling the yuan to stabilise its value, facilitating a controlled adjustment of the currency’s exchange rate.

Balancing Market Dynamics

In effect, what’s happening here is a tightly monitored balancing act. The People’s Bank is not passively observing market developments; it actively shapes expectations and cushions abrupt shifts. By anchoring the midpoint near 7.2518, policymakers are sending a deliberate signal to the market. It isn’t an arbitrary figure – it reflects both international pressure from a strengthening dollar and domestic considerations such as trade competitiveness and capital flow management.

When the central bank sets the reference point at that level, it narrows the field within which the yuan is permitted to fluctuate. This gives us as traders a bounded parameter to work from within the day—no surprises outside that 2% margin unless something unanticipated forces intervention. It also underpins a daily rhythm, a sort of reset button that hints at the central bank’s tolerance for movements, volatility, or divergence from policy goals.

From our perspective in derivatives, the essence lies in predictability and the range. Hedging strategies, spot-future basis calculations, and short-dated vol surfaces all rely on clarity in how far the currency might swing intraday. The fresh midpoint acts as a pivot. If the yuan drifts higher toward the top range, we can reasonably infer which direction intervention risk begins to rise. If the midpoint shifts several days in a row without much market-driven reason, then it’s time to question what underlying goal is being addressed—perhaps import pricing or offshore arbitrage.

The bulk of this is mechanical but intentional. When Liu and other officials allow the exchange rate to walk near the edges of this band without stepping in, it’s a licence for traders to price in tactical risks. But when responses tighten or guidance appears to contradict spot moves, there’s tension to reconcile in options pricing. That’s where volatility premiums begin to reflect not only fundamentals but political will.

So while our eyes might be on interest-rate spreads between regions or on absolute currency reserves, it’s these quiet adjustments—the midpoints, the tweaks to daily references—that function as soft policy tools. They’re hints, not headlines. This week’s projected reference level strongly discourages moves toward appreciating too sharply, signalling preference for a weaker—or at least a contained—yuan.

Expect short-term forwards to lean slightly wider until there’s evidence of stabilising capital flows. In the meantime, any asymmetry between spot and midpoint tells far more than official statements. Transparency isn’t always verbal—it is often numerical. As we build positions, we should shape the structure of our trades to respect that corridor rather than fight against it.

One final practical note: if we observe adjustments that consistently underprice spot moves, the risk isn’t so much outright depreciation but a shift in the band itself. That becomes a different game entirely, requiring recalibration of models that depend on that 2% width. Until then, it’s a matter of tracking daily bias—how far they’re willing to push the boundary without needing to redraw it completely.

Create your live VT Markets account and start trading now.